Designing the Business Portfolio: Portfolio

Analysis – Boston Matrix
The business portfolio is one of the most crucial factors for any organization. Why? Because
it is about what the organization plans, sells, and stops to sell. The business portfolio must be
based on the company’s mission, objectives and strategy, in order to fit the company’s
strengths and weaknesses, philosophy and competencies to opportunities in the market
environment. Designing the business portfolio involves analysing the company’s current
portfolio, before strategies for growth and downsizing can be developed. The Boston Growth-
Share Matrix, developed by the Boston Consulting Group, is a very helpful tool for analysing
the company’s current portfolio.

The business portfolio is the complete collection of products and businesses that make up a
company. Designing and maintaining a healthy portfolio involves thorough understanding of
the firm’s objectives and the markets it wants to serve. Business portfolio planning consists
of two steps, in which the Boston Matrix provides a great aid. Firstly, the business must
analyse its current business portfolio to determine which businesses (SBUs, see below)
should receive more, less, or no investment. This is significantly influenced by the life cycle
stage the products are in. Does the product reach the end of its life cycle end soon? Then, it
should not receive too much attention anymore. Secondly, the firm must shape its future
portfolio, based on the analysis of the current portfolio, by developing strategies for growth
and downsizing.

To analyse the current portfolio, the Boston Growth-Share Matrix should be applied. It assists
in evaluating the businesses that make up the company and the attention they should receive.
The idea behind this is that management will want to put more resources into its more
profitable products and businesses and on the contrary, less resources into weaker products
and businesses.

The first step that needs to be taken is to identify the key businesses that make up the
company: The Strategic Business Units (SBUs). Strategic Business Units may be a division
of the company, a product line, a brand or even a single product. Then, the company is able to
assess the attractiveness of each SBU in order to decide how much attention, or support, it
should receive. Why should the firm do so? Clearly because it helps to find the way in which
it should best use its strengths and competencies in order to take advantage of attractive
opportunities in the market environment. Therefore, each SBU should be analysed with
regard to the attractiveness of its market or industry and the strength of its position in that
market or industry.

The Boston Growth-Share Matrix addresses this. It was developed by the Boston Consulting
Group (BCG), which is a leading management consulting group, and is today the best-known
and most popular portfolio-planning method. The Boston Matrix classifies all the companies
SBUs according to the attractiveness of the SBUs industry or market, which is measured in
terms or market growth rate, and the SBUs position in that industry or market, measured in
terms of relative market share the company has. On the vertical axis, market growth rate
provides a measure for the attractiveness of the SBUs market. On the horizontal axis, relative
market share measures the company’s strength in that market.
The market growth and relative market share of each SBU leads to a classification into one of
four categories:

1. Stars are high-growth, high-share products or businesses. Those often require heavy
investments to finance their rapid growth. Once their growth slows down, which will
eventually be the case, Stars will turn into Cash Cows.
2. Cash Cows. Cash Cows are low-growth, but high-share products or businesses. They
need less investment to hold their market share, being well-established and successful
SBUs. Therefore, Cash Cows produce a lot of cash which the company can use to
invest in and support other SBUs that need investments to finance their growth,
namely Question Marks and Stars.
3. Question Marks. Question Marks are low-share Strategic Business Units, but in
high-growth markets. To hold their share, not mentioning increasing it which would
be desirable, Question Marks require a lot of cash. If Question Marks become a
success, they will turn into Stars one day. However, the likelihood that they fail must
not be neglected. For that reason, management has to decide carefully which Question
Marks will receive attention and investment in order to build them into stars, and
which other, less promising ones will be phased out.
4. Dogs are low-growth, low-share businesses and products. In other words, Dogs are
the least desirable SBUs of a company. They may generate enough cash still to
maintain themselves. However, Dogs will not be large sources of cash, and should be
 phased out as soon as they become unprofitable or as soon as the firm can make better
use of its resources to support other SBUs.

Usually, products or businesses of a company always start as a Question Mark. If they

succeed, they will move on and market share will grow, turning them into Stars. As the
market is satisfied and market growth falls, Stars become Cash Cows, a major source of cash
for the firm. Finally, even the best Cash Cows become dogs when the end of their life cycle is
reached.

As said before, the classification into Stars, Cash Cows, Question Marks and Dogs is strongly
linked to the Product Life Cycle stage the Strategic Business Unit is in. Question Marks are
new, innovative products, which may become a large success in the future, but still carry the
risk that they will not be a hit. Stars are still growing, while Cash Cows are in the maturity
stage when the market is satisfied and does not grow much anymore. Finally, when decline is
reached, SBUs can be called Dogs.

When the firm has classified the SBUs, it can determine the roles each SBU will play in the
future, in order to shape the future business portfolio. The company can choose from four
strategies for each business unit. Firstly, it can invest more in the SBU in order to build and
grow its market share. This will apply particularly well to Question Marks and Stars.
Secondly, it can invest just enough to hold the market share of the SBU at its current level,
which applies to Cash Cows. Or, thirdly, it can harvest the SBU, which means milking its
short-term cash flows, but regardless of the long-term effect. Finally, the firm can choose to
divest the SBU, either by selling it or by phasing it out, in order to make better use of
valuable resources elsewhere. This would be done with a Dog on the business portfolio.

After having evaluated the current business portfolio, the company should look at the future.
In rapidly changing times, constant innovation is critical to survival in the market. Therefore,
the second part of designing the business portfolio involves finding products and businesses
the company should consider in the future, by developing strategies for growth and
downsizing.

Benefits and Limitations of the BCG-

Matrix
Benefits of the BCG-Matrix:

 The BCG-Matrix is helpful for managers to evaluate balance in the companies’s

current portfolio of Stars, Cash Cows, Question Marks and Dogs.
 BCG-Matrix is applicable to large companies that seek volume and experience
effects.
 The model is simple and easy to understand.
 It provides a base for management to decide and prepare for future actions.
 If a company is able to use the experience curve to its advantage, it should be able to
manufacture and sell new products at a price that is low enough to get early market
share leadership. Once it becomes a star, it is destined to be profitable.

Limitations of the BCG-Matrix:

 It neglects the effects of synergies between business units.

 High market share is not the only success factor.
 Market growth is not the only indicator for attractiveness of a market.
 Sometimes Dogs can earn even more cash as Cash Cows.
 The problems of getting data on the market share and market growth.
 There is no clear definition of what constitutes a “market”.
 A high market share does not necessarily lead to profitability all the time.
 The model uses only two dimensions – market share and growth rate. This may tempt
management to emphasize a particular product, or todivest prematurely.
 A business with a low market share can be profitable too.
 The model neglects small competitors that have fast growing market shares.

http://www.quickmba.com/strategy/competitive-advantage/

A competitive advantage is an advantage that a company has over its competitors. Companies use
their competitive advantage to sell more than their competitors and increase market share.
According to QuickMBA, the two main drivers of competitive advantage are cost advantage, which
allows a company to charge lower prices than its competitors, and differentiation, which enables it
to offer product features and benefits that competitors cannot match. To achieve and maintain a
competitive advantage, a company aims to make the best use of its resources, such as people,
knowledge, materials and reputation, and capabilities, such as innovation, speed, efficiency and
quality.
Cost

Companies that use cost to drive competitive advantage provide customers with the same
benefits as competitors, but they are able to produce products or deliver services at lower
cost. Cost advantage can result from several factors, including lower labor costs, higher levels
of productivity, access to lower cost raw materials, or economies of scale through high-
volume production.

Differentiation

Companies achieve differentiation through factors that competitors cannot match such as
superior performance, higher quality, lower maintenance costs or other benefits that are
important to customers. By offering customers superior benefits, companies can offer
increased value at the same price as competitors. They can also differentiate themselves
through intangible benefits such as reputation or brand image -- factors that give customers
the confidence to buy their products or services.

Barriers

When a company is able to create barriers to entry, it develops a powerful competitive

advantage. Registering product patents, for example, can prevent market entrants from
competing directly with similar products. Where raw materials or other important
components are scarce, companies secure supplies to protect their business and reduce
competitors’ ability to source essential supplies.

Barriers

When a company is able to create barriers to entry, it develops a powerful competitive

advantage. Registering product patents, for example, can prevent market entrants from
competing directly with similar products. Where raw materials or other important
components are scarce, companies secure supplies to protect their business and reduce
competitors’ ability to source essential supplies.

https://www.ifm.eng.cam.ac.uk/research/dstools/porters-generic-competitive-strategies/

Market Entry Strategy Analysis

Whether you are introducing a new product to the market or entering a new market with an existing
product, a coherent market entry strategy is necessary. Your business needs to evaluate any barriers
to entry, such as cost, legal considerations, industry regulations and existing competition. If there are
no significant barriers to market entry, your business should proceed in designing and implementing
its market entry strategy.
Filling a Market Gap

Your business' product or service should fill a market gap. In other words, you need to
provide something that doesn't already exist in the marketplace. It doesn't have to be
completely original. Perhaps you serve a previously untapped consumer group or cater to a
specific niche. Your business could also fill a gap by doing something better or cheaper than
anyone else. Identifying what market gap you fill is helpful in positioning your product or
service.

Differentiating

If your business is entering with an already existing product or service -- which is very likely
-- you have two primary means of differentiation, price and quality. How you position your
product within the market should help determine which strategy you pursue. Using a price
strategy attempts to undercut your competition by providing your product cheaper. If you use
this strategy, your business is striving to maximize profits through volume. A quality strategy
attempts to position your product as a luxury good, one that is worth paying more for.

Entry Speed

Whether you jump into the market all at once, or favor a more gradual implementation, is an
important strategy consideration. If you enter very quickly, you risk overestimating demand
and consequently having overproduction. Overproduction can be very costly in terms of
capital investment, driving prices down and operations management up. If, however, you
enter too slowly, you risk losing market share to competitors or substitute products. The
strategy you choose depends on your product, its positioning and your evaluation of the
market.

International Market Entry

When entering a foreign market, there are a number of additional considerations. Your
business has four general strategies for entry: exporting, licensing, joint venture and direct
investment. Exporting and licensing are indirect ways to enter a market and rely on a foreign
company in the host country. These methods are lower risk and require minimal investment.
The potential profits are lower. A joint venture or direct investment strategy is riskier and can
require significant investment. The profit potential is higher.

What is Strategic Analysis?

Strategic analysis refers to the process of conducting research on a company and its operating
environment to formulate a strategy. The definition of strategic analysis may differ from an
academic or business perspective, but the process involves several common factors:

1. Identifying and evaluating data relevant to the company’s strategy

2. Defining the internal and external environments to be analyzed
 3. Using several analytic methods such as Porter’s five forces analysis, SWOT analysis, and
value chain analysis

What is Strategy?

A strategy is a plan of actions taken by managers to achieve the company’s overall goal and
other subsidiary goals. It determines the success of a company. In strategy, a company is
essentially asking itself, “Where do you want to play and how are you going to win?” The
following guide gives a high-level overview of business strategy, its implementation, and the
processes to lead to business success.

Vision, Mission, and Values

To develop a business strategy, a company needs a very well-defined understanding of what

it is and what it represents. Strategists need to look at the following:

 Vision – What it wants to achieve in the future (5-10 years)

 Mission Statement – What business a company is in and rallies people
 Values – The fundamental beliefs of an organization reflecting its commitments and ethics

After gaining a deep understanding of the company’s vision, mission, and values, strategists
can help the business undergo a strategic analysis. The purpose of a strategic analysis is to
analyze an organization’s external and internal environment, assess current strategies, and
generate and evaluate the most successful strategic alternatives.

Strategic Analysis Process

The following infographic demonstrates the strategic analysis process:

 
 

1. Perform an environmental analysis of current strategies

Starting from the beginning, a company needs to complete an environmental analysis of its
current strategies. Internal environment considerations include issues such as operational
inefficiencies, employee morale, and constraints from financial issues. External environment
considerations include political trends, economic shifts, and changes in consumer tastes.

2. Determine the effectiveness of existing strategies

A key purpose of a strategic analysis is to determine the effectiveness of the current strategy
amid the prevailing business environment. Strategists must ask themselves questions such as:
Is our strategy failing or succeeding? Will we meet our stated goals? Does our strategy align
with our vision, mission, and values?

3. Formulate plans

If the answer to the questions posed in the assessment stage is “No” or “Unsure,” we undergo
a planning stage where the company proposes strategic alternatives. Strategists may propose
ways to keep costs low and operations leaner. Potential strategic alternatives include changes
in capital structure, changes in supply chain management, or any other alternative to a
business process.

4. Recommend and implement the most viable strategy

Lastly, after assessing strategies and proposing alternatives, we reach the recommendation.
After assessing all possible strategic alternatives, we choose to implement the most viable
and quantitatively profitable strategy. After producing a recommendation, we iteratively
repeat the entire process. Strategies must be implemented, assessed, and re-assessed. They
must change because business environments are not static.

Levels of Strategy

Strategic plans involve three levels in terms of scope:

1. Corporate-level (Portfolio)

At the highest level, corporate strategy involves high-level strategic decisions that will help a
company sustain a competitive advantage and remain profitable in the foreseeable future.
Corporate-level decisions are all-encompassing of a company.

2. Business-level

At the median level of strategy are business-level decisions. The business-level strategy
focuses on market positions to help the company gain a competitive advantage in its own
industry or other industries.

3. Functional-level

At the lowest level are functional-level decisions. They focus on activities within and
between different functions aimed at improving the efficiency of the overall business. The
strategies are focused on particular functions and groups.

What is a Business Portfolio?

Home » Accounting Dictionary » What is a Business Portfolio?
Definition: A business portfolio is a group of products, services, and business units that
conform a given company and allows it to pursue its strategic goals. This portfolio can also
be defined as the set of available assets that the company possess to develop its mission and
reach its vision.

What Does Business Portfolio Mean?

A business portfolio is different from a product portfolio in that the latter is only focused on
the physical items sold by the company. On the other hand, a business portfolio is focused on
a wider range of elements including productive assets such as equipment, machinery and
fixed assets.

It may also include business assets such as business units, subsidiaries and strategic alliances,
along with the available product lines, patents, registered brands and other valuable elements
that can be employed to produce positive financial results for the company. An adequate
management of the business portfolio will increase its performance and results by taking
advantage of all its resources.

This portfolio should also be planned and designed according to the company’s mission,
vision and strategic objectives, in order to develop those that are required through those that
are currently available.

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Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to
its current line of business. Synergy may result through the application of management
expertise or financial resources, but the primary purpose of conglomerate diversification is
improved profitability of the acquiring firm. Little, if any, concern is given to achieving
marketing or production synergy with conglomerate diversification.

One of the most common reasons for pursuing a conglomerate growth strategy is that
opportunities in a firm's current line of business are limited. Finding an attractive investment
opportunity requires the firm to consider alternatives in other types of business. Philip
Morris's acquisition of Miller Brewing was a conglomerate move. Products, markets, and
production technologies of the brewery were quite different from those required to produce
cigarettes.

Firms may also pursue a conglomerate diversification strategy as a means of increasing the
firm's growth rate. As discussed earlier, growth in sales may make the company more
attractive to investors. Growth may also increase the power and prestige of the firm's
executives. Conglomerate growth may be effective if the new area has growth opportunities
greater than those available in the existing line of business.

Probably the biggest disadvantage of a conglomerate diversification strategy is the increase in

administrative problems associated with operating unrelated businesses. Managers from
different divisions may have different backgrounds and may be unable to work together
effectively. Competition between strategic business units for resources may entail shifting
resources away from one division to another. Such a move may create rivalry and
administrative problems between the units
Caution must also be exercised in entering businesses with seemingly promising
opportunities, especially if the management team lacks experience or skill in the new line of
business. Without some knowledge of the new industry, a firm may be unable to accurately
evaluate the industry's potential. Even if the new business is initially successful, problems
will eventually occur. Executives from the conglomerate will have to become involved in the
operations of the new enterprise at some point. Without adequate experience or skills
(Management Synergy) the new business may become a poor performer.

Without some form of strategic fit, the combined performance of the individual units will
probably not exceed the performance of the units operating independently. In fact, combined
performance may deteriorate because of controls placed on the individual units by the parent
conglomerate. Decision-making may become slower due to longer review periods and
complicated reporting systems.

https://www.marketing91.com/diversification-strategy-better/

https://thetrainingassociates.com/blog/5-stages-strategic-management-process/

https://salesbenchmarkindex.com/insights/strategic-alignment-what-it-is-and-why-you-need-it/

https://www.ukessays.com/essays/marketing/firm-can-achieve-cost-leadership-and-differentiation-
simultaneously-marketing-essay.php

https://corporatefinanceinstitute.com/resources/knowledge/strategy/strategic-alliances/

https://keydifferences.com/difference-between-business-strategy-and-corporate-strategy.html

https://www.projectguru.in/publications/importance-resource-based-view/

Financial Objectives vs Strategic Objectives

In Financial Objectives an organisation only plans for the financial issues of the business.
These Objectives only covers how much money needs to invest in the company to achieve
the required target. How to earn more profit within the amount available for the business and
how to increase the profit ratio and decrease the expenditures. While in Strategic Objectives
all the aspects of the business are taken into consideration. Planning to run the business, to
invest the money, to hire the employers, marketing, deal with the competitors, etc.So we can
say that Financial Objectives covers only financial issues while Strategies Objectives deals
with all the aspects of business.